What is Dark Cloud Cover Candlestick & Its Formation?

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  • 23 Nov 2023
What is Dark Cloud Cover Candlestick & Its Formation?

Key Highlights

  • Dark Cloud Cover is a bearish candlestick pattern indicating a potential reversal in a bullish trend.
  • It consists of two candles: a bullish one followed by a bearish one, signifying a shift in market sentiment.
  • The bearish candle covers more than half of the previous day's bullish candle, resembling a "dark cloud."
  • This pattern is easily recognizable, even for novice traders, and suggests a potential downturn in the market.
  • It is more reliable when observed in an uptrend rather than a choppy trend.

One of the candlestick patterns that indicates a possible downturn from a continuing rally is dark cloud cover. There are two candlesticks in this motif. A bullish candlestick appears first, followed by a bearish one.

The traders are alerted to the end of the current bullish trend by the bearish candlestick. The huge black candle that covers the sunny candle from the previous day resembles a "dark cloud," thus the term "dark cloud cover." Finding this pattern is not too difficult. As a result, even inexperienced traders may recognize and decipher this pattern.

When there is a lot of demand for the stock during the first phase, a black cloud cover pattern is created. Customers now have price control thanks to it. When the price rises, sellers seize the initiative later and sharply drop the price. This change from purchasing to selling points to a more likely reversal in the future. It is often less trustworthy if the same pattern is seen from the choppy trend rather than the upswing.

When a "bearish candle" opens above the closing of the preceding "bullish candle" but closes below the middle of the "bullish candle," it is indicative of a dark cloud cover pattern. Because it signals an impending reversal, traders can use this pattern to determine when to start a short position or leave an extended position.

The amount of stock traded at the time the candlestick forms determines the likelihood of a reversal. There is an excellent likelihood of a reversal if the traded volume is larger and vice versa. On charts with longer periods, such as daily charts, traders may more easily analyze the black cloud cover pattern. Smaller time intervals have less bearing.

ABC Corporation's bearish candlestick opened at 75.60, above the close of the previous bullish candlestick, which was at 70.20. At 72.80, it closed, closing below the preceding bullish candlestick's midpoint of 78.00. It is important to wait to presume that the dark cloud cover pattern has formed until the third day's candlestick is observed. The stock formed a bullish candlestick the next day, starting the day's trading at 77.30 and ending at 76.15. This result indicates that the pattern has not materialized.

Moreover, the finish of the previous bullish candlestick, which ended at 91.20, was surpassed by the start of the bearish candlestick for XYZ Industries, which started at 98.75. At the close, it stood at 92.85, below the earlier bullish candlestick's midpoint at 99.40. The next day, the stock started at 94.50 and closed at 97.20. As a result, the candlestick that developed was negative. This validates the black cloud cover pattern's presence, advising traders to think about cutting their long position in XYZ Industries or starting a short one.

When a bullish candle with a "gap up" is followed the next day by a bearish candle, the dark cloud cover pattern is formed. This indicates a break in the stock price chart from the prior closing that was caused by no trading activity.

Traders consider the following factors when determining if a dark cloud cover will form:

  • An initial upswing in the
  • Long and bullish candle. The length displays the possible reversing force.
  • A hole appeared in the following day's bearish candle
  • Bearish candle formation
  • A bearish candle ends below the bullish candle's middle.

Also, the shadows on both candlesticks are either short or nonexistent and have big bodies. Larger candles represent increased trading engagement. This pattern becomes less significant as fewer candles develop. When another bearish candle follows a bearish candle on the third day, the pattern is verified. This implies that the pattern might not hold up if the price does not drop anymore on the third day.

Conclusion

It is possible to determine whether or not a development of dark clouds indicates a possible decline in a number of ways. It is frequently used by traders in combination with other technical trading tools, such as trend lines, stochastic oscillators for confirmation, and support and resistance lines. If traders choose to cut their long position, they might think about doing so the next day or at the conclusion of the bearish candle. Similarly, traders who want to enter at this moment might set their stop-loss above the bearish candle's highest point.

FAQs on Dark Cloud Cover Candlestick Pattern

The dark cloud cover pattern is opposed to the piercing candlestick pattern, which suggests a bullish reversal. It implies a possible reversal towards the upswing after beginning with a downturn.

Given that a giant black candle covers the candle from the previous day, like a "dark cloud," it is named "dark cloud cover."

The Dark Cloud Cover is distinct in that it requires two specific candles to form. It is the opposite of the Piercing Line pattern, which is a bullish reversal pattern.

Traders should look for additional confirmation signals such as bearish indicators, support and resistance levels, or other technical analysis tools before making trading decisions based solely on the Dark Cloud Cover pattern.

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